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When Will Hosted IP Telephony Reach its Potential, Or Has It?

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May 23, 2011

When Will Hosted IP Telephony Reach its Potential, Or Has It?

By Gary Kim, Contributing Editor

Hosted IP telephony in the U.S. market continues to grow, but remains a business that many would argue has not yet achieved its potential.  In fact, according to IDC (News - Alert), the U.S. hosted IP telephony and hosted unified communications markets represent an annual services revenue stream of a bit more than $500 million.

That might not even be the big question. The big question is whether hosted IP telephony already has reached much of its potential. That is not meant as a provocative statement, but simply the starting point for an analysis of a service that resembles the older “Centrex” product it in many ways displaces, at a time when other collaboration and communication services and applications have risen to prominence. 

It would be reasonable to expect hosted IP telephony to reach $1 billion in annual revenue at some point in the near future, perhaps by 2014 to 2015 or so. For anybody who has followed the U.S. telecommunications long enough, that will suggest a couple of conclusions. 

First, it does not appear that the U.S. hosted IP telephony will anytime soon  be a bigger market than Centrex used to be, which is to say something about the size of a $2.5 billion annual revenues business.  That make be a sobering thought for many industry professionals, who have spent so much time and capital to create those solutions. 

Keep in mind that the U.S. fixed-line business represents about $500 billion in annual revenue, while mobile telephony represents about another $500 billion in annual revenue. 

U.S. hosted IP telephony revenue segment is painfully small in relation to the total annual service provider revenue stream of about $1 billion, roughly half of which is generated by mobility. 

On the other hand, according to the Telecommunications Industry Association (News - Alert), actual voice revenues in the U.S. market already could be as low as $25 billion annually, all the rest of the annual fixed-line revenue being earned by private line, Internet access, video and other revenues. 

Either way, hosted IP telephony is a very-small part of the overall fixed line revenue stream, and an insignificant part of total industry revenues, considering that mobile alone represents half of total revenue. Against $25 billion of voice revenue, hosted IP telephony would represent about two percent of annual revenue. Against $500 billion of total revenue, hosted IP telephony represents a tenth of a percent of fixed line revenues.

In fact, unified communications is a bigger business, representing $1.4 billion or so, according to the TIA (News - Alert). Videoconferencing service revenue likewise already stands at $2.6 billion. 

Web conferencing services now are a $2 billion annual revenue stream. Audioconferencing is a $3 billion annual revenues business. Taken altogether, conferencing is a $7 billion to $8 billion revenues business. 

If one assumes that enterprise voice revenues are about 40 percent of total, then about $10 billion a year is earned selling voice services to U.S. enterprises. Of course, some percentage of voice revenue also is sold to small businesses and organizations whose revenue is buried in the “mass markets” segment, and which also represent part of the sales opportunity for hosted IP telephony.

That isn’t to say hosted IP telephony is not disproportionately important to some industry segments, just as the web conferencing segment is intensely of interest to specialized providers of web conferencing services. 

Still, it might be time to start asking why the “lead offer” seems always to be the basic “business voice and data access” bundle that is a mainstay of small business offers these days. 

Based on current revenue, one might just as well make the lead offer “data access plus conferencing,” for example.
Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Rich Steeves

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